Competitive Currency Manipulation A Comment on the Inefficiency of the International Legal Regime
Volume II – Issue II, 2019
The adoption of predictable, market-determined exchange rate policies is critical for the wellbeing of national and global economies. Orderly exchange rate policies facilitate cross-border trade and investments in a sustained manner. However, many nations adopt myopic, self-serving exchange rate policies that give immediate gains to the said nations but disrupt the international objective of achieving market efficiency. To elaborate, administered undervaluation of a country’s currency tends to improve its trade balance by boosting exports and reducing imports, increase foreign exchange reserves, and attract foreign investment. However, this “beggar thy neighbour” attitude is contrary to the primary goal of achieving international market efficiency for general welfare. It also runs the risk of nudging other countries to manipulate their own currencies in self-defence. From that point on, there is a high possibility of the global economy plunging into pervasive economic stagnation and worse. For instance, immediately after the World War I, major economic players of that age, competitively devalued their currencies in the hope that the boost in exports would provide the necessary stimulus for economic growth. Unfortunately, the said devaluation, combined with protectionist trade policies, contributed significantly to the intensity and duration of the Great Depression.
In fact, the Great Depression served as a catalyst for efforts to create international institutions and compacts that would guard against administered pricing of currency. These efforts culminated into the formation of the IMF and the conclusion of the GATT- both involved ceding of a part national sovereignty over monetary and trade affairs in the interest of boosting standards of living around the world. However, this international legal framework has not been strong enough to tackle the problem of currency manipulation. The practice of administered devaluation of currencies continues unabated and this is more worrying- given the interconnectedness and interdependence of economies, currency wars between two economies could impact the world economy. It precludes the value of currency from being determined by market fundamentals of demand and supply and thereby causes imbalances on cross-border flow of goods, services, and investments.
Prudence indicates that remedial steps are warranted. As the drafters of the IMF’s Articles and the GATT recognized, currency manipulation and the resultant skewed exchange rates have extensive and undesirable repercussions for international trade and investment. With so much at stake, and in the hope that study of the past can encourage a constructive course of action for the future, the research paper initially reviews the economic rationale behind currency manipulation and studies the difficulties that arise with competitive currency manipulation. It and then focuses upon the international legal framework created in response to currency manipulation- both the IMF’s Articles of Agreement and various WTO Agreements. It concludes by suggesting that, short of any amendments to their constitutional charters, the WTO and the IMF, in tandem, could apply their resources in a coordinated fashion to deter and hold any resurgence of competitive currency manipulation.
KEYWORDS: Currency manipulation, devaluation, trade equilibrium, inflation, growth, The Great Depression, Unemployment, aggregate demand, import substitution, Jamaica Agreement, Most-Favoured Nation, National Treatment, Agreement on Subsidies and Countervailing Measures.
MATERIALS AND METHODS: Doctrinal study with reliance placed on Books, Articles, Caselaws..